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Retail: The battle for consumers heats up

Its 9.30 on Sunday morning and they have already put up the elastic cordons to allow the queue for 15 items or fewer to snake round on itself at the Extra supermarket in the Bela Vista neighbourhood of São Paulo.

Jumbo packs of bread rolls and sweet polvilho biscuits made of manioc flour are selling well. Upstairs, the store is doing a brisk line in small electronics, including fans and coffee machines.

The chain of supermarkets aimed at low- to middle-income consumers is riding the retail boom in the country and the rise of the consumer classes.

Between the end of 2006 and June this year, the retail market grew by 45 per cent while the US market shrunk some 5 per cent, according to Altair Rossato, head of the consumer business industry at Deloitte in São Paulo.

Much of the new consumerism is a result of higher salaries and movements up the social scale. This is a really huge transition. Millions of people are moving up a class on a monthly basis, says Mr Rossato.

In Brazil, people earning more than R$4,807 (US$2,753) a month are described as class A and B, those earning between R$1,115 and R$4,806 as class C and those on less than that as classes D and E.

At the bottom of the pyramid, government assistance has been helping the very poor to consume more and enter the D and E brackets. Suppliers of food and essentials serving poorer segments, particularly in the north-east, have seen rapid sales growth.

This has helped boost results from supermarkets, which are also benefiting from increased consumption further up the social scale. Brazil has contributed to the performance of international chains more than most of the rest of the world. Frances Carrefour saw its income in Brazil rise 14.3 per cent in the first half of this year.

It is in the bulging middle that the greatest changes have been occurring, with an explosion in class C consumers. Between 2005-09, the number belonging to classes A and B grew a healthy 8 per cent; but that is dwarfed by the number in class C, which grew by 27 per cent to include more than half the population, notes Mr Rossato.

Brazils relatively short-lived economic downturn did affect the way these consumers spent. Those in class C, who had been keen to buy their first car or even apartment, lost confidence. Instead, they switched their buying power to items offering more immediate gratification.

They are also ever more image-conscious and there is a greater focus on beauty, among men and women, hence the massive increases in sales from cosmetics companies such as Natura, Boticario and Avon, he notes. Naturas third quarter net profits were up just over 19 per cent year-on-year.

As confidence returns, people will start making big purchases again. Credit is lubricating sales, as more consumers are able to access borrowing and retailers devise ingenious ways to stretch out payments so that they fit the budget of lower-income consumers.

Lower interest rates, more competition from banks and staggered payments with low or no interest rates have all driven up sales of more expensive items.

Indeed, when chain stores open on the outskirts of cities, managements are amazed at how many low-income consumers are buying expensive items such as LCD TVs, notes Nabil Sahyoun, president of the association of shopping centres, Alshop.

The ability to stagger payment through instalments and the role of TV as the main leisure activity explain this growth, he says. Other electrical products are also moving up the list of necessities, including washing machines, as well as newer model mobile phones.

The shopping experience is going upmarket too with an exodus of shops from the streets, open to the weather and vulnerable to the countrys notorious violence, and into shopping malls.

There are just 689 shopping centres in Brazil today. However, there are a further 79 under construction, 26 of which should be inaugurated this year, says Mr Sahyoun. That is luring large chains to plan big investments. Last year, US giant Walmart announced it was planning to invest some $1bn in Brazil. The battle for the Brazilian consumer is heating up.